Entries Tagged as 'Know it Now'

“Legally Valid” is Not a Tough Threshold to Meet

online legal formsThese days it’s hard to listen to the radio, watch television or go on-line without being inundated by ads pitching the latest and greatest do-it-yourself, on-line, estate plan documents: who needs those money grubbing lawyers anyway? One thing all of these pitches have in common is the assurance that the forms are legally valid and binding. Truth be told, “legally valid” is not a tough threshold to meet. If the person signing the Will (or trust, or, you name it) has the requisite mental capacity under the laws of the state where the document is being signed, and the document is signed, witnessed, or notarized in accordance with the laws of the state, it is legally valid. Legal validity, however, is only part of the story. Imagine the shock years down the road when it is discovered that an estate plan put in place by well meaning parents, intending to provide for each other and their children upon their disability and eventual deaths, does nothing of the sort.

I recently had the opportunity to help a young couple with very small children, where one spouse was facing a life threatening illness. They were referred to me to review their revocable living trust. I was under the impression that it had been drafted by another lawyer, and, therefore, my initial review was not clouded or prejudiced in any way. As I went through the document I was appalled at what I perceived to be the utter incompetence of a fellow practitioner, and, quite frankly, dumfounded as to why and how any attorney could pass something like this off on unsuspecting clients. The document was grossly deficient in a number of particulars, and, more importantly, would not have accomplished the desired result of providing for the surviving spouse and children upon the disability or death of one of the parents. It was then that I learned that in their haste to insure that the surviving spouse and children would be provided for, the couple turned not to a lawyer, but to one of the popular on-line sites for their estate planning needs, which included a revocable living trust (for which they paid a fairly sizeable sum I might add).

To enumerate and explain the deficiencies in the document would exceed the space allowed here, so I’ll only touch upon three, specifically:

  1. form
  2. concept, and
  3. substance.

First, from the standpoint of form, although touted by the website to be a Michigan specific document, the terminology used was not consistent with, or reflective of, Michigan law. This past April 1, 2010, the Michigan Trust Code went into effect, changing many aspects of Michigan trust law. Those changes had not found their way into the document.

online legal formsSecond, the document was premised upon property law concepts that are not followed in Michigan. Admittedly, this is where the explanation can get technical and complicated, so I’ll convey only the basics. Insofar as property ownership between a husband and wife is concerned, 40 states follow concepts derived from, and based upon, English common law. There are 10 states, however, that characterize property owned by a husband and wife pursuant to concepts that can be traced to French and Spanish civil law. Those states are said to be “community property” states. And, even within these groupings of common law and community property law jurisdictions, there are many variations. The salient fact remains, however, that property owned by a husband and wife is treated differently in community property and common law jurisdictions. Michigan is not a community property state. Yet, this document, although touted to be a Michigan specific document, employed community property terminology and concepts.

Lastly, there are many reasons why people need estate plans, and trusts in particular, ranging from tax savings to probate avoidance. For people with children, the primary need for a trust is to provide for the children upon the death or incapacity of one or both parents. Without a trust, minor children will receive their inheritance when they turn 18; all of it. Because that is rarely a good idea, trusts are the means of providing a method for holding property and administering it for the benefit of the children according to a detailed plan of distribution determined by the parents, in advance. The trust document I was asked to review contained none of these provisions. Although this couple had a number of children, upon the death of the second spouse to die, the trust assets would simply be held for distribution to each child as he or she turned 18. The document contained no provisions for the administration and distribution of the trust property for the care of the children while they were young.

Was this a legally valid and binding trust? It was. Would this trust have fulfilled the intentions and desires of this young couple and the needs of their family? Not even close. The problem is that they had no way of knowing that. For users of these on-line documents, it will be years or decades before the ultimate beneficiaries will learn just how bad the documents are. Merely filling in the blanks on a form is no substitute for the expertise of an experienced estate planning attorney. There is a reason why we dedicate our working lives and energy doing what we do.

Dan A. Penning

Keeping Track of Expenses Directly Related to Your Volunteer Services

From Lee Flaherty…..

By the time you receive this email, I will be basking in sunny Arizona while attending a conference related to one of my volunteer interests. (Well, maybe not “basking.” The temperature is expected to exceed 100°!) As virtually all of us volunteer in some capacity at one time or another, I thought a review of what expenses we volunteers can claim as tax deductions might be helpful.

Keeping track of volunteer service expensesI’ll set this in the context of a real-life example. Some of you still make periodic trips down to the Gulf Coast to help with post-Hurricane Katrina recovery efforts. If you are going down as a volunteer with a charity and your out-of-pocket expenses are not reimbursed, then your travel expenses and possible other expenses can be deducted as long as they are properly documented. This is true whether you’re a laborer building houses, or a board member attending meetings.

In any case, only expenses directly related to your volunteer service may be deducted. Typical examples are the cost of transportation, meals and lodging. (Sorry, probably no deduction for the admission to Dolly World on the way through Tennessee, or the cost of replacing your cell phone after you accidentally drop it into fresh cement.) If you purchase items such as food or building materials for the charity you are working with, then those items are generally deductible, too.

Under no circumstances, however, may you deduct the value of your services. Your 40 hours spent hanging drywall may save the charity considerable expense, but that’s not a gift for which Uncle Sam is willing to give you a tax break.

In order to be deductible, your expenses must be reasonable, and there can be no significant element of personal pleasure associated with them. This doesn’t mean you can’t take a day to relax in the course of a week spent building homes, but the element of pleasure must be minor when contrasted with the importance or duration of your charitable service. (There is, unfortunately, no bright-line rule on how to measure when that element of personal pleasure ceases to be minor!)

As you would expect, you must maintain careful records of your expenses. If you intend to deduct your mileage (this year’s charity rate for vehicle mileage is $.14 per mile), then you must keep a detailed mileage log. If you prefer instead to deduct your actual cost of gas, then you must keep receipts. If a receipt’s charitable purpose is not clear, then describe that purpose right on the receipt.

If an expense exceeds $250, then you must get a written acknowledgment or receipt from your charity. The acknowledgment should describe the expense incurred and state whether the charity provided you with any goods or services in return. If you did receive goods or services, then the receipt needs to give a good-faith estimate of their value.

We Americans are extraordinary in our willingness to give of our time and our money. That generosity of spirit is one of the many things that make our country exceptional. Continue to volunteer wherever you can, but don’t miss the opportunity to take advantage any tax deductions that may become available to you as a result!

Lee Flaherty
Wright Penning & Beamer

Remembering the Day, Remembering the Heroes

As sports celebrities fall from grace on an ever increasing basis, we often hear the lament “Where have all the heroes gone?” But a shamed superstar is not a shamed hero. Fallen role model? Maybe. Fallen idol? Probably. Fallen hero? No.

Saluting Soldier Honoring all American HeroesWe tend to throw the term “hero” around loosely, ascribing it to everyone we admire or look up to. A hero, traditionally understood, belongs to a far narrower subset. A hero is someone who willingly places him or herself in harm’s way to protect the safety of another or the public good.

Volunteering at the shelter or coaching Little League are laudable activities, but they don’t make us heroes.

We could have a lively debate about what has made this country “great,” but surely we would acknowledge a history filled with men and women who made the ultimate personal sacrifice to secure for others life, liberty and the pursuit of happiness.

The American Flag in honor of fallen American HeroesAs we close another Memorial Day weekend, I hope you take a moment to remember the fallen heroes from Boston Commons to Baghdad who offered their best for all of us.

Dan A. Penning

Oil and Gas Leases: What Northern Michigan Landowners Should Know

Oil and Gas Leases: What Northern Michigan Landowners Should Know

Oil and Gas Leases: What Northern Michigan Landowners Should KnowRecently, many of my firm’s clients who own multiple acres of land in northern Michigan have been contacted by petroleum company representatives and offered oil and gas rights leases for their land. While many of these companies are reputable and offer fairly standard terms in their leases, they are generally trying to secure leases that are most favorable to them. The landowner should be aware of provisions that can be included to protect their investment and maximize the owner’s financial return.

Know What Your Oil and Gas Rights are Worth

Most oil and gas leases propose two financial benefits. The first is the oil and gas lease price per acre. Recently, one major oil and gas company paid up to $5,000.00 per acre for what they had determined to be land located strategically close to what the company believed would be a very fertile and productive natural gas field. While not all landowners will be fortunate enough to garner that type of lease price, it is not unusual for companies to make initial offers at a fraction of the amount they are willing to pay to lease a landowners oil and gas rights. Rarely is the first offer the best offer they are willing to make.

The second financial benefit is the “royalty” to be paid by the oil and gas company in the event their exploration results in the installation of an active well to extract oil or gas. Recently, oil and gas companies negotiated oil and gas leases for thousands of acres of state lands and agreed to pay the state royalties at a rate of 1/6th of the gross revenue resulting from an active well. As a result, landowners should not agree to anything less than the State of Michigan was able to negotiate for its royalty rate. I recently reviewed an oil and gas lease for a client that proposed a 1/10th royalty rate which we easily negotiated to the more favorable 1/6th rate being paid to the State.

Avoid Deduction of “Post Production Costs” From Royalties

Many proposed oil and gas leases will include provisions allowing an oil and gas company to deduct a portion of the company’s “post production costs” (PPCs) which essentially is simply a practice of the companies lowering their overhead and increasing their profits by passing overhead costs on to the landowner to be deducted from royalties. Landowners should be careful to make sure their royalties are to be paid off the gross revenue from a well with nothing other than a proportionate share of applicable government taxes being deducted from the royalty payment.

Require the Inclusion of a “Pugh Clause” in the Lease

Locations of Michigan Oil and Gas Wells: What Northern Michigan Landowners Should Know about oil and gas leasesA “Pugh Clause” protects the landowner by requiring the oil and gas company to release certain land subject to the lease after termination of the lease term that has not been pooled into the land subject to the royalty payment in the event an active well results from the lease and exploration. For example, an oil and gas company may only pool an apportion of the leased land for royalty purposes and without a Pugh Clause, the companies in some instances can tie up the entire parcel subject to the lease even though they are only paying royalties on a portion of the land.

There are other concerns that also should be addressed and included in the lease to protect the landowner including where the placement of well will be allowed, where facilities can be constructed on the landowners property and provisions specifying that the companies must restore the land to its original condition after completing various activities on the land.

Be Prepared

There has been a significant increase in the oil and gas activity in northern Michigan in the last six months. Oftentimes the oil and gas leases are presented in a fast and furious fashion. Don’t be afraid to take your time and carefully consider any proposed lease and determine whether there are other companies also interested in the oil and gas rights to your land. A little competition never hurts the process. Also, seeking the advice and input of a qualified attorney to protect your rights as the landowner is also recommended.

Dan A. Penning

Business Succession: Beyond Buy-Sell Agreements for the Closely Held Business

Business Succession Plan for moving beyond buy-sell agreements for the closely held businessA large portion of the businesses in the United States are closely held companies, and many of the closely held companies are family owned enterprises. The long term perpetuation of the family business is a common and laudable goal of most founders. Developing strategic and successful transitions to subsequent generations largely centers on who will control the company and whether the control will be concentrated in one family member or a small group of family members, or if the control of the company will be spread out among a large group of family members or all the family members. Limiting control to a sole shareholder or a concentrated group of shareholders that are involved in the company is usually the preferable option. The founder’s decision to select the most advantageous successor(s) is hardly adequate, however, and many founders approach this first order of business tepidly and do not make the difficult decision due to the attendant consequences that include a possible disruption of the business and family relationships. A successful transition inevitably involves addressing the possible conflicts that will arise within the company itself and among the family members involved. Conflicts can emerge from the most expected and unexpected sources, and a founder that is willing to plan for and manage potential conflict will provide a more secure foundation for the business to continue successfully beyond his or her lifetime.

A part of a lawyer’s arsenal in assisting the family business owner is to formulate a succession plan and draft a buy-sell agreement that determines the steps and the results of various shareholders buying out other shareholders and under what circumstances a shareholder may or may not continue as a shareholder in the business. In many family situations, however, the inherent conflicts that arise and come to the surface are because the family has not been taught the intangible character development and emotional fortitude that is necessary to successfully navigate and resolve disagreements. Personality clashes, the history of family members’ childhood relationships, opposing perspectives on the management and operation of the family business, and the founder’s choice of who will succeed to the control and ownership of the company have the potential to ignite family blow ups.

Business Succession Planning table for moving beyond buy-sell agreements for the closely held businessLawyers provide legal advice in these unfortunate situations, however, lawyers also have a unique perspective in that we also see successful family enterprises implement transition plans that go beyond the necessary buy-sell agreement. Successful family transitions are usually the result of cultivating cooperation, understanding, and forgiveness amongst family members. Founders who succeed at fostering personal growth and character development, including honesty, respect and leadership alongside teaching business acumen generally observe a more successful and peaceful generational transition of the control of their business. The founders themselves must make a deliberate and long term dedication to cultivating a family culture that brings in and nurtures the emotional intelligence necessary to perpetuate a successful family business. There are a myriad of resources available to business owners who desire guidance in this area. The Family Firm Institute, Inc. is an excellent starting point. The attorneys at Wright Penning & Beamer are committed to helping our clients successfully transition their businesses to the next generation, and we can provide you with resources that will complement a comprehensive buy-sell agreement.

Dan A. Penning

Do You Qualify for Small Business Health Care Tax Credit?

SmallThe Patient Protection and Affordable Care Act was enacted in March of 2010. One of the first provisions to go into effect from the Act is the small business health care tax credit. The purpose of the credit is to encourage small businesses to offer health insurance coverage to their employees for the first time or maintain coverage they have, and to help small businesses that employ primarily low- to moderate-income employees.

The IRS touts “three simple steps,” which can be found at http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf, to determine if you qualify for credit in the 2010 tax year:

  1. Determine your total number of employees (not including owners or family members),
  2. Calculate the average annual wages of employees (not including owners or family members), and
  3. You pay at least half the insurance premium for employees at the single coverage rate.

PatientIf for 2010, your total number of employees is less than 25, the average annual wages is less than $50,000, and you satisfy #3, the credit is likely available to you. The maximum credit, which goes to employers with 10 or fewer full-time equivalent employees and annual average wages of $25,000 or less, is 35 percent of premiums paid by eligible small business and 25 percent of premiums paid by eligible tax-exempt organizations.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return. For tax-exempt organizations, the IRS will issue further instructions on how to claim the credit.

Dan A. Penning

Speed Traps Set to Increase Revenues

Speed Traps and the 85th Percentile

How are speed limits set in the first place?
Speed Trap Set to Increase Revenues A Michigan State Police Lieutenant made news recently when he confirmed publicly a fact many have long suspected: in many places throughout the state, speed limits are set artificially low. Speed limits that are too low result in speeding tickets which equate to revenue for cash strapped local units of government. This assessment was then confirmed by a local police chief whose jurisdiction includes a stretch of one of the most heavily traveled roads in the state. As the road crosses into his city, the speed limit drops to a point that, as he admits, likely cannot be justified. The city has no intention of raising the speed limit, however, because of the revenue it generates for the city. A state lawmaker believes that the problem of artificially low speed limits has gotten so out of hand that he has introduced legislation that will force local communities to correct speed limits that are set too low. The question then becomes, how are speed limits set in the first place?

Justified on the basis of public safety
Traffic moving at a snail's pace sign The right to set speed limits is an exercise of the police power of the state and is therefore justified on the basis of public safety. Speed limits are intended to reflect a reasonable and safe speed that will facilitate the safe and orderly flow of traffic under normal conditions. Research has shown that the majority of motorists operate their vehicles in a safe and reasonable manner, hence, traffic laws and speed limits that reflect the behavior of the majority of motorists are the most successful. The inverse is also true: traffic laws and speed limits that arbitrarily restrict the majority of motorists encourage violations, lack public support and rarely achieve the desired result. Speed limits are not to be set based upon unreasoned opinion but upon thorough traffic engineering studies. Those studies include an analysis of such factors as the number and types of accidents that have occurred, the number of cars traveling the road, their speeds, the presence of pedestrians, the physical condition of the road surface, hills, curves, number of lanes, driveways, intersections, and so on.

A certain speed is intuitive to the majority of motorists
The primary method for establishing a proper, realistic and safe speed is something known as the 85th percentile. The 85th percentile speed is the top speed at which 85% of motorists will drive on any given road at any given time without regard for slower traffic congestion or weather. The 85th percentile speed is the speed that most motorists consider safe and reasonable, pretty much without regard for the posted speed. In fact, research has shown that artificially raising the posted speed above the 85th percentile does not necessarily result in faster speeds, just as artificially lowering the posted speed below the 85th percentile does not necessarily result in lower speeds. It is not really a conscious decision to drive at a certain speed but one that is intuitive to the majority of motorists.

Established traffic engineering practices
Michigan law provides that all traffic control devices placed anywhere in the state must conform to the national standards set forth in the Manual on Uniform Traffic Control Devices and must be placed in accordance with a written traffic control order. This includes the setting of speed limits and speed limit signs. Sections of the Manual provide that speed limits are to be set based upon traffic engineering studies made in accordance with established traffic engineering practices. Further, speed limits should be within 5 mph of the 85th percentile speed.

Unrealistic speed limits are not followed
Slow road and speed traps While realistic speed limits are generally followed, unrealistic speed limits are not. Absent strict, continuous, and visible enforcement, artificially low speed limits will be ignored. And any adherence that does result is limited to the immediate time and immediate area of the enforcement (i.e., speed traps). If you find yourself getting a ticket in an area where the posted speed limit just doesn’t seem to make sense, you might consider asking the municipality for a copy of the traffic control order and the engineering studies upon which the speed limit was based. If the speed limit is not within 5 mph of the 85th percentile speed, and, no other unique and distinguishing factors exist, you just might have a defense. You might also want to keep an eye on the pending legislation.

Dan A. Penning

What the New Michigan No Smoking Law Means to Business

The New Michigan Statewide Smoking Ban: How it Affects Us

On May 1, 2010, the “Dr. Ron Davis Smoke-Free Air Law” went into effect in Michigan. Smoking is now banned in most public buildings in Michigan and in outdoor areas where food or beverages are served, such as restaurant patios and porches.

There are a few exemptions to the new law. Individuals still may smoke in cigar bars, tobacco specialty retail stores, and on the gaming floors of Detroit’s casinos. The exemption for the casinos is automatic. Cigar bars and tobacco specialty retail stores, on the other hand, must meet certain requirements and file an affidavit with the Michigan Department of Community Health by June 1, 2010, in order to be exempted. Tribal casinos are not covered by the new law, so their operators are free to permit smoking wherever they like.

Most any other indoor space used by the general public is subject to the ban, even bingo halls, private clubs, and the indoor common areas of multi-unit apartment buildings and condominium buildings. Some examples of the places in which smoking is now prohibited are hotel/motel guest rooms, malls, restaurants, arenas, concert halls, and places of employment that are not otherwise exempted.

Owners and operators of spaces covered by the smoking ban are required to take several steps in order to comply with the new law. Briefly, those steps are:

  1. Post “no smoking” signs or the international “no smoking” symbol at each entrance and in each area where smoking is prohibited.
  2. Remove ashtrays and smoking paraphernalia from areas where smoking is prohibited.
  3. Ask people who are smoking in smoke-free areas to stop smoking.
  4. Refuse service to those who are smoking in violation of the law, and ask them to leave if they refuse to comply.

More information, including “no smoking” signs and affidavits for exemption, can be found at www.michigan.gov/smokefreelaw.

Dan A. Penning

Surefire Way to Avoid Civil Cause of Action for Damages

Minors, alcohol and underage drinking
Minors, alcohol and underage drinkingAs we approach the season of high-school proms, graduations and graduation open houses and parties, it is important to remember the basics concerning alcohol, minors and underage drinking. What may seem like a harmless or innocent circumstance in providing a minor with an alcoholic beverage can result in negative consequences lasting a lifetime to both the adult and the minor child.

Zero tolerance by police officers
Minors in Possession Zero Tolerance by Police OfficersThe laws are simple. First, it is against the law for a person under the age of 21 to consume any alcoholic beverage or have any bodily alcohol content period. If a minor child is determined to have consumed an alcoholic beverage or have any bodily alcohol content, they can be charged with a misdemeanor leading to fines, court-ordered substance abuse counseling, and in the case of multiple violations or offenses, up to 90 days in jail. You may have heard that many police agencies have made enforcement of the “minor in possession laws” (”MIP”) a top priority. There is typically a zero tolerance by police officers who have reason to believe a minor has consumed or is in possession of alcohol.

Civil cause of action for damages
Next, it is against the law to sell or furnish alcohol to a minor. What some individuals don’t realize is that someone who furnishes alcohol to a minor, who is then involved in an accident causing bodily injury or death to another individual, is guilty of a felony punishable with imprisonment of up to 10 years. Finally, in addition to criminal penalties, Michigan law provides the ability for an individual who is injured by a person under 21 years of age who is under the influence of alcohol in an automobile accident or any other occurrence to pursue a civil cause of action for damages against a “social host” who provided the alcohol to that individual. It is also important to note that several homeowner insurance policies have, over the past few years, become much more stringent in excluding such occurrences from insurance coverage in the event a civil cause of action is filed and pursued against a social host who provided alcohol to a person under the age of 21.

Think twice before you pour
Think twice before you pour a minor a drinkThe rules are simple. The consequences are clear. Underage individuals who drink alcohol, and the persons who provide them with the alcohol, will face severe consequences. It is important to keep these important facts in mind when planning your upcoming graduation celebrations.

Dan A. Penning

Stealing the Help and Kissing Your Sister

Paying your competitor’s attorney fees in Non-Compete Cases

Non compete agreementsAfter seventeen years practicing law, I find that most business clients appreciate the services I have to offer and are willing to pay a fair fee for them. But I have yet to meet a client who feels at all inclined to pay the legal bill of a competitor who has just sued. That’s like being thirteen and kissing your sister. Yet when corporations sue each other over the alleged theft of a valuable employee, the dispute can quickly become a fight over attorney fees.

Any time you hire a competitor’s current or former employee (or independent contractor), you face the risk of a lawsuit from the competitor alleging improper interference with a contract, or some other form of unfair competition. If the employee had a written agreement not to compete with the former employer, the risk of such a suit is all the greater. Risk assessment needs to be part of the hiring decision so you can decide whether the potential employee’s attributes justify the risk. In performing that assessment, you have to consider the possibility of paying not only damages but also the cost of your own – and even your competitor’s – legal fees.

Judge's injunction to stop alleged unfair competitionIf the competitor goes to the trouble of suing you, it will probably bring every plausible claim available against you. In non-compete cases, this usually involves a claim that the employee and you have conspired to steal the competitor’s trade secrets and proprietary information. In most lawsuits between business competitors, each side pays its own legal expenses – win, lose or draw. But under Michigan’s version of the Uniform Trade Secrets Act, a prevailing plaintiff can recover attorney fees if it shows that the defendant willfully and maliciously stole a trade secret.

Just as I have never met a client anxious to pay a competitor’s lawyer, I have also never met a client (whether a corporation or an individual business person) who believes he acted maliciously in his business dealings. Unfortunately, there is scant case law in Michigan clearly defining willful and malicious conduct under the Uniform Trade Secrets Act. As a result, in virtually every non-compete case brought naming you as a defendant, you will face the argument – and the risk – that you did act maliciously.

Most non-compete cases start with a request for an immediate injunction to stop the alleged unfair competition. This requires the judge to conduct a hearing that resembles a mini-trial at the outset of the lawsuit. The judge’s decision whether or not to grant the injunction will be widely viewed as a barometer of the ultimate merits of the case. Consequently, many cases settle once the judge grants or denies the injunction requested, if not before. In the mean time, the parties – and the suing party in particular – will have incurred substantial legal bills in a short amount of time. (In one case I defended, the opponent racked up about sixty thousand dollars in fees in the one month between filing and settling the case.) With the judge’s decision on the injunction having effectively resolved the merits of the claim, the parties are left to fight over who should foot the bill for having brought the matter to court.

Minimize risk of paying competitor's attorney feesObviously, the judge’s decision on the injunction will either strengthen or weaken the suing party’s claim that you acted maliciously. Either way, both sides will need to consider carefully how much more legal expense they are willing to incur solely to fight over who should pay the fees to date. If the case appears ready for settlement even before the judge rules on the request for an injunction, you still may face a fight over attorney fees. I have seen plaintiffs with no real damages become all the more insistent that they recover attorney fees as a matter of principle to ensure that the perceived misconduct does not go unpunished. If you are defending, do you buckle and pay some portion of the other side’s fees, or do you hold ground as a matter of principle? If you hold fast, you may end up paying far more money in the long run, albeit to your own attorney rather than to your competitor’s. As a colleague once told me, “It is perfectly appropriate to stand on principle, once you have acknowledged that principle is expensive.”

How do you avoid the distasteful dilemma of paying some portion of a competitor’s attorney fees? While no answer is full proof, there are steps you can take to minimize the risk:

  1. Fully assess the risk going in. When interviewing potential employees, have them confirm in writing as part of the interview process whether they have obligations under an existing non-compete agreement. If they answer “no,” it will be harder for a competitor to show you acted willfully and maliciously in the hiring process. If the answer is “yes,” then you know you face a greater threat of a lawsuit and, consequently, may not want to hire the individual. (One caveat: if you do hire the individual notwithstanding his written admission of an existing non-compete, you may strengthen the argument that you have acted with malicious motives.)
  2. Avoid trade secrets. If you do hire a competitor’s current or former employee, be extremely vigilant in instructing the new employee and all who work with him that you will not condone any using or sharing of the competitor’s proprietary information and trade secrets. Monitor the situation for compliance. This will make it harder for your competitor to seek fees under the Uniform Fair Trade Practices Act.
  3. Assess your risks again. If you do find yourself in a lawsuit, make sure your initial assessment of your potential liability includes a proper allowance for attorney fees. It rarely makes sense to hold fast to an unreasonably low settlement position, only to spend far more in defense than what you could have resolved the case for early on.

By their nature, non-compete cases force the parties to spend considerable legal fees early in the process, often before either side has a solid understanding of the damages suffered. Many times, the actual damages a suing competitor is able to prove will be far smaller than the fees incurred. Given the attorney fee award provisions under the Uniform Trade Secrets Act, you could find yourself fighting to avoid a fee award against you, even in a case where you have caused no measurable harm to your competitor. Try your best to understand your risks before making the hire. That doesn’t mean you won’t make the hire if the employee is worth the risk. After all, most thirteen year olds would kiss their sister — for the right price.

Dirk A. Beamer